5 questions with Joseph Tzeng

Crystal Ventures has spent the last decade investing in China and Silicon Valley. The firm started out by putting 70% of its money in the United States and 30% in Asia, but it has flip-flopped that investment ratio to take advantage of an exploding Chinese economy. PE Week Senior Writer Alexander Haislip recently sat down with Crystal Managing Director Joseph Tzeng to get the latest tips on Chinese investing.

Q: What is it like to work with the Chinese government?

A: We keep to the moral high-ground. We don’t give bribes or take short cuts, and we try to be as understanding as possible of the officials who have their own mandates. We’ve learned to be flexible. Even on a contractual basis, we have to be very flexible, and that’s one of the hardest things to learn because it goes against everything you know in the U.S.

Q: What mistakes do Westerners make when doing business in China?

A: A lot of people think it’s all about connections or pulling strings by knowing people. But quanxi [A Chinese word that relates to the U.S. notion of networking or schmoozing] isn’t for getting a special deal. For us, to play with quanxi is to try to find a way to help a portfolio company without breaking the law. Some of our U.S. colleagues think quanxi is all about lobbying. It’s not. Lobbying would scare government officials. You have to be familiar with them on a daily basis and show your respect. But you couldn’t take them to a fancy restaurant; they’d be guarded.

Q; How is the IPO market looking in China?

A: The Hong Kong and Singapore exchanges understand China stories better. When times are good, Nasdaq buys into Chinese stocks, but when there’s a downturn, those are the first to be sold.

Q: What do you think of Kleiner Perkins’ foray into the China market?

A: If they make it, they could pull the industry up to the next level. But it’s not a given. In China, it’s not a given that a great entrepreneur makes a great investor. The chances are 50-50.

Making money is easy, but making a legacy is much harder. The market is very generous right now, a lot of mistakes can be covered, but you have to be careful that those mistakes don’t catch up with you. One success, such as Suntech, represents 200 failures in the clean energy market. The good side is that everybody has a chance. There’s no John Doerr. There’s no Vinod [Khosla].

Q: What has been the hardest lesson to learn about investing in China?

A: We made a lot of mistakes with Sina. The secret was to adopt the local people and work from the inside. That reflects on how we hire and how we handle the founders. We try not to impose too much on them. It will not work if you insist on your American way. We can’t interfere, half of the company would leave and the founder would leave too. You can’t replace them easily.

Most of my American colleagues are still in the mode of thinking it’s a rising area, where the idea is to take the land and industrialize. It’s very offensive to management there. The reason Yahoo failed, or retreated to Alibaba, was because Yahoo was heavy-handed.

It requires twice as much hard work to do business over there, but it’s twice as fun. The hardest part is hiring. There’s no established head hunting market or industry. The need for executives is much, much higher there than in Silicon Valley.